Articles / Alternative Dispute Resolution
DirecTV, Inc. v. Imburgia
Arbitration has been receiving a great deal of negative publicity lately, in particular from theNew York Times. Much of the press’ criticism of the practice relates to the use of arbitration in consumer contracts and clauses waiving class actions, and the California courts have been the most aggressive in striking down such clauses. Thus, the U.S. Supreme Court’s decision this past December not only upholding an arbitration clause, but a class action waiver clause in a consumer contract, is especially noteworthy. Moreover, the decision was 6-3, written by Justice Breyer, and joined by Justice Kagan as well as Justices Roberts, Scalia, Kennedy, and Alito.
At first blush, the result may seem surprising – especially given the “liberal” justices who wrote and joined in the opinion. On examination, however, the decision turns on two fundamental legal principles: i) the Federal Arbitration Act preempts state law, and ii) arbitration clauses must be interpreted consistent with their clear language and in the same manner as all other contracts. Implicit in the decision is the Supreme Court’s comfort with, and legal acceptance of, arbitration generally and class action waivers in particular.
Briefly, DirecTV’s service agreement with its customers included a clause requiring that all disputes be arbitrated, and additionally included a clause stating “neither you nor we shall be entitled to join or consolidate claims in arbitration,” which the California and Supreme Court interpreted to be a waiver of class actions. Finally, the agreement included two additional clauses: one stating, as reported by the Court, “if the ‘law of your state’ makes the waiver of class arbitration unenforceable, then the entire arbitration provision ‘is unenforceable,” and, “the arbitration provision ‘shall be governed by the Federal Arbitration Act.’”
In an excellent summary of the decision, Sullivan & Cromwell LLP states: “the Supreme Court again reminded the California courts that the [Federal Arbitration Act] preempts state-law judicial interpretations that uniquely disadvantage arbitration contracts.” The Supreme Court held: “we must decide whether the decision of the California court places arbitration contracts ‘on equal footing with all other contracts.’ And in doing so, we must examine whether the [California Court’s] decision in fact rests upon ‘grounds as exist at law or in equity for the revocation of any contract.’”
The Supreme Court found that the California Court applied different standards and different interpretations to arbitration clauses. It held: “California’s interpretation of the phrase ‘law of your state’ does not place arbitration contracts ‘on equal footing with all other contracts.’ For that reason, it does not give ‘due regard. . . to the federal policy favoring arbitration.’ Thus, the [California Court’s] interpretation is pre-empted by the Federal Arbitration Act.”
DirecTV, Inc. v. Imburgia, the full Supreme Court opinion
Sullivan & Cromwell, LLP, “U.S. Supreme Court Rejects California Court’s Attempt to Invalidate Class-Arbitration Waivers”
Masuda Funai Eifert & Mitchell Ltd, “U.S. Supreme Court Again Strikes Down California Arbitration Restrictions”
Sundra Rajoo speech: “Transformation and Expansion of Arbitral Institutional Roles amidst the Rise of Regionalism”:
Datuk Professor Sundra Rajoo is the Director of the Kuala Lumpur Regional Centre for Arbitration and current President of the Chartered Institute of Arbitrators. As such, he is without question one of, if not THE, leading authority on the development of regional arbitration centers and their impact on international arbitration. He’s also a terrific guy. Full disclosure: I’m an active member and board director of the Chartered Institute of Arbitrator’s North America branch and was recently appointed to the Kuala Lumpur Regional Centre’s panel of commercial arbitrators.
Prof. Rajoo was the principal speaker at the Asia-Pacific Forum of International Arbitration’s (AFIA) Symposium held in Sydney Australia this past November. That particular venue is known for the opportunity it provides AFIA’s members, and in particular their younger members, with “a forum to discuss issues and developments in international arbitration, with a particular focus on Asia-Pacific.” Prof Rajoo used the opportunity to discuss the rise of regionalism in the international arbitral world, and how it is transforming the role of arbitral institutions and the practice of arbitration generally.
For those who practice in the international arbitration arena, the speech is a worthy read because it discusses the economic impact of these centers, the innovation and diversity of products which competing regional centers have spawned, and Prof. Rajoo’s analysis of recent trends and the future outlook, particularly with respect to arbitration in Asia.
Prof. Rajoo’s conclusions:
“This move away from having just a few established international institutions which enjoy a monopoly on international arbitration, to a wider choice of institutions (in the Asian context) should no doubt improve the users’ experience of international arbitration, thereby furthering the notion that Asia is increasingly become a trendsetter and a leader in the realm of public international law. The roles that Arbitral Institutions [play] in the coming years will remain most crucial.
Along with a growth in regionalism, will arise an era of regional integration. This reflects the economic growth in the region which is also deeply focussed on regional integration. This transformation and adaptation to the expanding role and duties of arbitral institutions will ensure the quick evolution of International Arbitration and ADR in the coming era.”
The full text of Datuk Professor Sundra Rajoo’s speech
As noted in the introductory letter to this Newsletter, one knows one is doing well in China when one is being copied. Using that same twisted logic, arbitral awards must be hugely successful and effective if being used in a money transfer scam.
Here’s the latest, presented not as a recommended means to circumvent the law or as a threat one needs to defend against, but rather for amusement and to place an explanation point on the fact that arbitral awards are being recognized and enforced in China.
China, as many know, has strict laws governing and restricting the transfer of cash out of the country. As the Yuan falls, many affluent Chinese are trying to move cash to Western countries and invest in Western currencies and assets (this has been reported in the New York Times and other global financial papers). Given the PRC’s money transfer restrictions, some are trying creative ways to “circumvent” the law. This scam is one of the more creative efforts.
Here’s how it goes: 1) Affluent Chinese individual (“Money Man”) creates a corporation (“Newco”) in the country he wishes to move the money. 2) Newco and Money Man enter into a contract, which Money Man then breaches. 3) Newco and Money Man arbitrate the dispute and damages, with Money Man conceding liability and damages in an amount equal to the sum he wishes to move out of China. 4) An arbitral award is entered and enforced under the New York Convention. Result: money “legally” transferred out of China to Money Man’s destination country.
Thanks to Dan Harris, China Law Blog, for sharing this. If you are looking for a laugh, I commend you to it.
Dan Harris, China Law Blog, “Getting Money out of China by Losing in Arbitration”
Louise Story, Stephanie Saul, New York Times, “Stream of Foreign Wealth Flows to Elite New York Real Estate,”